Rate cut on the horizon? Vishrut Rana on what could be RBI’s next move

“This is pulling back investment and it is likely to have slightly inflationary impacts in the US in particular, which means slightly more elevated interest rates and this is going to impact Asia-Pacific through tighter monetary policy,” says Vishrut Rana, S&P Global Ratings.Let me first up ask you about the tariffs, the impact that this is going to have globally. We have been getting a lot of commentary. At one point in time you think that Trump is going to go all out, all aggressive. This morning you got comments where he said April 2nd is when he will put the reciprocal tariffs, but they will be lenient. How should one read into all of these developments and react to that?Vishrut Rana: Indeed in these highly uncertain times a lot to watch out for. So, the impact of tariffs on the global economy is going to be significant. We think that it is already having an impact in terms of delaying investment plans for firms across the region until there is more clarity in terms of where the trade tensions are going to materialise. This is pulling back investment and it is likely to have slightly inflationary impacts in the US in particular, which means slightly more elevated interest rates and this is going to impact Asia-Pacific through tighter monetary policy. In contrast, in the region we think that there is more trade sensitive economies will be affected a little bit more, more domestically oriented ones such as India will be affected a little bit less. All in all, certainly interesting times and a lot to digest.Now, from what we understand, S&P has lowered its GDP forecast for India by 20 bps, from 6.7 earlier to 6.5. Do you believe this is only on the back of the tariff uncertainty we are seeing or do you think there are some internal headwinds like commodity inflation or monsoons or other factors that could be at play over here? And what is the rationale behind this 20 bps drive down for India’s GDP outlook?Vishrut Rana: So, the primary driver for our downward revision of our forecast from 6.7% to 6.5% for the upcoming fiscal is the domestic story. So, we think that the slight slowdown in domestic economic momentum over the past few months is the main factor that is leading to our downward revision.

We think that this is going to come back into the picture. We think there is a recovery that is going to start towards the later half of this year. However, the external environment is not supportive because of the trade tensions that we just spoke about. So, it is as if there is this domestic slowdown which is not being offset by external demand, which is the reason why we have that slight downward revision. But I wanted to understand what is your view and what are you pencilling in for the interest rate cycle, given the fact that it looks like we are in for a bit of easing more or profound easing of interest rates, at least back home, that is what the indications that we are getting in, actually reports also suggesting that the RBI governor is likely to tilt in favour of having more lower interest rates. What is your assumptions and what are you pencilling in when you talk about the interest rates back home here?Vishrut Rana: So, one of the factors that will support the outlook for India over the course of the upcoming fiscal is the easing in monetary policy. One supportive factor for that has been that inflation has been under control.So, inflation has come down to within the RBI’s target range and this gives room for the central bank to ease policy. Interest rates have been relatively elevated in India for a couple of years now, which means that there is space to cut. We expect 75 basis points of cuts in monetary policy in India, so to 5.5 by the end of fiscal. This is in line with the rest of the region, I would say, where we do not see so much inflation. It is a bit in contrast to what we see in the US.

We do not expect that much easing in the US, so there is going to be this capital outflow pressure. But for India, it means more accommodative monetary policy and some support to growth from that space.

Since you said that you are expecting 75 basis point interest rate cut till the end of next fiscal year is what I suppose, I want to understand so are you expecting that come next month also the RBI or the MPC to look at lowering interest rates?Vishrut Rana: Following the easing in February, we think that there is probably room for another rate cut while inflation continues to be in the tolerance band. So, we expect that there is likely to be some easing in the near term. It may not be precisely at the next meeting, but we think that at least over the next few months we should be seeing in some rate cuts coming in. 25 basis points, probably not very aggressive, but certainly on the path towards more easing towards the end of the year.